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Free Trade Does Not Exist

Bill Gates, not surprisingly, in a recent interview with the Financial Times, criticized the now bipartisan–and, perhaps surprisingly, increasingly international–hostility toward “free trade” and “globalization,” emphatically declaring that he is an “unabashed free trader.” Unlike the more simplistic advocates (and opponents) of “free trade,” Gates at least tried to offer specific American and international examples to substantiate his position, while (sort of) grounding it in American interests rather than Davoisie “lifting people out of poverty” bromides. The cases he chose, however, reveal precisely how ideologically constrained and intellectually dishonest our current debate over “free trade” is, and serve only to further expose the intellectual bankruptcy of the American elite.

Easy as it might be to criticize the political judgment of having Gates become the chief advocate of any policy in the present moment, one would expect him to be exactly the sort of business leader who could offer real insight on American economic policy. Unlike the most recent vintage of Silicon Valley plutocrats, Gates’ generation actually did accomplish a technological revolution. Gates at least made his fortune by stealing products from Xerox to remarkably improve worker productivity. He is undoubtedly an American hero compared to, say, Mark Zuckerberg–a walking justification of confiscatory socialism if ever there was one–who made his fortune stealing products from the (now defunct) Harvard Porcellian Club to create perhaps the most repulsive and dehumanizing website in history. Thus it is all the more disappointing that Gates, rather than elevate the current debate on trade, chose instead to retreat into empty cliches.

The thrust of Gates’ argument is that the U.S. has been a net beneficiary of “free trade” and “globalization;” in fact “it’s the biggest beneficiary by far.” Of course whether the U.S. has been a net beneficiary of free trade in recent years is a reasonable, if not entirely unquestionable, view, and one’s opinion is largely dependent upon personal circumstance–no doubt Gates has benefited tremendously. But the claim that the U.S. has been a bigger beneficiary “by far” than, for example, China is difficult to argue by any measure, and impossible to justify on the basis of relative geo-economic or political power.

Moreover, the examples Gates employs to illustrate his point, rather than proving the argument, only demonstrate how ideological current discussions on trade have become and how little grounding they have in actual economic realities. Gates says:

Who is the monster winner of all time in scale economic business — software, airplanes, pharmaceuticals, movies? Mmm. I wonder who that is?” he asked rhetorically.

We’ve taken for granted too much that people understand that consumers being able to buy a variety of goods and having price competition on those goods and us being the big winner in these scale markets … is a huge thing,” he added.

I wish for a week that we could shut down trade and then, you know, Boeing, Microsoft, Hollywood, pharma would resize their R&D departments for a couple of weeks for fun. And then two weeks later people would go ‘Holy smokes, that was not a very good deal’.

He compared some policies advocated in the US campaign with the attempts of countries such as Nigeria and Venezuela to erect trade barriers to defend their currencies….

Most fascinating about this somewhat Trumpian stream of consciousness is that Gates, who is obviously no idiot, probably listed the worst examples imaginable of “free trade” success stories, displaying either an incredible lack of basic industry knowledge or simply showcasing the paucity of genuine positive examples. If anything, the industries Gates mentions have been the biggest beneficiaries by far–and owe much of their success to–the very “protectionism” and mercantilist industrial policy Gates supposedly deplores.

Consider Boeing: not only is it a major supplier to the inherently “protectionist” defense industry, but it is one of the largest beneficiaries of government industrial promotion through the Export-Import Bank and other agencies. How does Gates think Boeing’s earnings would fare if these props were taken away? Boeing’s extensive lobbying to maintain and recently revive the ExIm Bank from Ted Cruz’s ideological overreach speaks for itself.

Pharma, similarly, is a massive beneficiary of increasingly arcane regulations limiting drug imports for various, often specious, reasons. Does the ban on reimportation of drugs from Canada and other generics really serve any purpose other than “artificially” propping up prescription drug prices? (Safety, indeed, yet somehow Europe manages!) How is this a triumph of “free trade”? Or is the real triumph simply the American government’s privileging of pharma companies in price negotiations? (All to stimulate R&D, of course!) A significant portion of new drugs are developed and marketed precisely to take advantage of byzantine Medicare reimbursement policies: how is this the free market in action? Meanwhile, squeezing pharma profits is perhaps the only realistic way to control current healthcare entitlement spending. The conflict between pharma’s profits versus free trade and consumer interests is perhaps more pronounced than any other industry.

Silicon Valley loves to talk about freedom, disruption, and all that–except when the disruption involves their intellectual property outside the U.S. Then dragooning the U.S. government to pressure foreigners in order to preserve Microsoft’s bottom line becomes the sine qua non of free enterprise. (In these cases, apparently, we can’t lift everyone out of poverty…) When Russia decides to force Google to host Russian data in country, increasing costs for American tech giants, then every U.S. government agency is expected to do its duty to preserve tech margins.

The libertarian pose of Peter Thiel and the tech industry more generally is laughable. Silicon Valley was born out of government research grants and contracts decades ago and continues to be a massive beneficiary of government support, from de facto U.S. control of significant internet infrastructure to the government contracts which built Palantir. Every one of South African stock promoter Elon Musk’s “moonshots,” for instance, involves enormous government subsidies if not outright patronage. IBM would be bankrupt if not for its overpriced government contracts, many of which could be better served by other providers anyway, and much cheaper from Indian cloud-based solutions (or whatever). Quite naturally, the tech industry loves outsourcing everyone except themselves, and yet is shocked when others desire the same protection. Government intervention against, say, Chinese dumping practices is “counterproductive,” but whenever China blocks another stupid photo sharing website, the unabashed free traders of Silicon Valley expect the U.S. government to give it first priority at the next bilateral summit.

Thus aerospace, pharma, and tech have all benefited from access to more markets, without question, but they have also benefited significantly–arguably even more–from U.S. government subsidies, commercial activism, industrial promotion, and, frankly, rank mercantilism if not outright protectionism.

And there is absolutely nothing wrong with that. Promoting American businesses is exactly what the U.S. government should be doing.

What is disgusting is that, for people like Bill Gates, along with the “economic experts” of conservative think tanks, being an “unabashed free trader” today actually means supporting government intervention for tech and pharma but opposing it for everything else. In today’s discourse, “free trade” means mercantilism for a few industries favored by the Davos zeitgeist, while any other government industrial promotion–or especially any effort to preserve livelihoods for American workers–is treated as the utmost in economic stupidity and the gravest possible betrayal of the American dream.

It really isn’t necessary to run Gates’ hypothetical experiment on what would happen to the R&D budgets of Silicon Valley and pharma patent trolls if government support (his version of “free trade”) were shut down for a week. That experiment has been done in various manufacturing and other sectors for years, and the results are precisely what Gates would predict. Yet somehow he is appalled that those at the wrong end of such experiments are now saying “that was not a very good deal.”

At least the magnanimous Gates mouths one concession to these “losers” of “free trade,” saying that “Maybe all of us should realize that in communities [such as in rust-belt] Ohio we didn’t do enough to address that problem.” Somehow redistributing the benefits of free trade is always the solution in speech but never implemented in practice. Of course the real problem is that while some transfer payments and “education” subsidies (because every unemployed worker should have a student loan to get a worthless degree) could modestly ameliorate the impact of adverse trade policies (maybe a tax credit or enterprise zone as well!), nothing can really be done for them. The most beneficial thing that could be done for them–simply considering their interests on par with Microsoft’s in future trade policy–has already been ideologically taken off the table.

Beyond that, however, Gates, as the richest man on the planet, head of one of the world’s largest companies, and titular leader of the so-called Giving Pledge (itself a travesty–a pledge without purpose except to serve as the finish line of the new Davoisie cursus honorum), could probably do more than any individual to implement the redistribution of trade benefits he suggests. Yet he has done absolutely nothing for rust-belt Ohio and never will–probably because he won’t get feted at international galas for helping other Americans.

As this Journal has argued many times, herein lies the root not only of American political decline but also its intellectual stagnation. The American elite actually has no attachment to the American nation and therefore is incapable of intelligently weighing or prosecuting its interests. The American elite indeed disdains the American people, and yet refuses to acknowledge the consequences should the American people come to disdain it. But if the American nation is really so shameful as the elites believe–or if the only valid community is something as meaningless as “the world”–no one should be surprised that the mass of voters may one day not care whether free trade is “positive sum.” There is no sum when there is not even an equation.

Now the [edit: pre-March 2016] #CruzCrew would doubtless object to the above on the grounds that they oppose all “corporate welfare” and want to get the jackboot of government completely off our necks, or whatever the focus-grouped slogan is now. They are going to get rid of the ExIm Bank, repeal Obamacare, unleash the animal spirits of the economy, cut corporate subsidies, and soon we’ll have Reagan-era growth, the Constitution, mom, and apple pie.

This approach is even worse. The problem with the current ideological hypocrisies is not the hypocrisy but the ideology. The hypocrisies at least represent some recognition of reality. In substituting ideological zeal for prudent considerations of American business interests, Cruz pursues a utopia with the fervor of Lenin and threatens similar economic catastrophe. If Cruz actually worked on trade in the Bush administration, at least when not gratuitously alienating people, he did not learn very much. In a world in which any sensible government aggressively promotes its country’s commercial interests, and in which, for the most part, the price of labor is comparatively lower than here, the cessation of U.S. industrial promotion is not “leveling the playing field” but voluntarily jumping off a cliff.

Although there are certainly tradeoffs to organizations like the ExIm Bank, the hostility of Cruz-style radicals is never based on any actual particulars but always on reflexive opposition to ideological categories like “corporate welfare.” Opposition to American industrial policy, such as it may be, is almost always inversely correlated with experience in international business and directly correlated with partisan careerism. It is not coincidental that the leading of opponent of the ExIm Bank, Tim Carney, who now “helps direct AEI’s Culture of Competition Project,” has never done anything but write for third-rate newspapers. Or his colleague Jim Pethokoukis, who likewise has done nothing outside of middle tier journalism. Both are fine human beings, no doubt, but can we find no one with actual business experience to write on trade policy?

If this Journal may be granted yet more latitude to understand Trump better than he understands himself, the underlying message of his rhetoric actually sets the discussion of trade policy on much firmer ground. Strip away the exaggeration (we’ll bring all the jobs back!) and bombast (unilaterally imposed 45% tariffs, though in theory such threats have to be on the table), and what remains is quite sensible:

(1) The U.S. government has an important role to play in international economic competition, and ought to promote U.S. businesses and U.S. workers however and whenever possible.

(2) Instead of empty ideological categories like “free trade” and “protectionism,” U.S. policymakers should acknowledge that there is no “free trade” outside of undergraduate economics textbooks and that trade agreements exist precisely to determine the winners and losers of those zero-sum transactions inherent in any global competition. As a result, the proper analysis of any trade agreement is simply an accurate calculation of the tangible costs and benefits, to whom and to how many (along with foreign policy considerations), over a realistic time horizon. Furthermore, at the present time, it may be prudent to marginally favor workers and wage protection over thinly distributed profits, all else being equal.

(3) Trade policy should be guided and implemented by people with real experience in international business, not lifetime academics, journalists, or bureaucrats.

In other words, it really is as simple as “making good deals” for the American people. It is only a detached elite that refuses to acknowledge that the American people have legitimate interests as Americans, or that trade deals are nothing more than “deals,” with winners and losers. There will be, to be sure, many disagreements over the particulars of which American industries or workers will gain or lose from any particular agreement, and there should be. That is precisely what should be debated in a reasonable discussion on trade, not senseless ideological slogans or whether our policy is good for the Chinese laborer.

The final example Gates brings up is Nigeria, criticizing its defense of its currency. Like all Gates’ examples, this one offers especially compelling proof for the opposite argument. For Nigeria defends its currency today for a simple reason: it has hardly any domestic industry. Nigeria, lacking refining capacity, sells its crude internationally and then imports virtually all refined products. Likewise, despite vast fertile lands, Nigerian agriculture is significantly underdeveloped. The local economy produces very little across the board. Thus, unlike Russia, Nigeria would hardly benefit from allowing its currency to depreciate with the price of oil. It would not make its exports (since there are none other than oil, priced in dollars and oil workers are mostly paid in dollars) more competitive or lead to import substitution in the same way it might for more developed economies. Nigeria’s choice is to either defend the currency and hope oil prices improve before reserves run out, or to devalue to such an extent as to effectively dollarize before reaping any competitive benefits.

Why? As always, there is more than one cause of a country’s condition. But one undeniable cause is the lack of trade protection that would allow for the development of domestic industry. And Nigeria offers a simple proof of this. The largest–and virtually only–worldclass, domestically owned business in Nigeria is Dangote Cement, founded by Africa’s richest man, Aliko Dangote, which was able to develop in large part because of aggressive tariffs on cement imports in its early years. By contrast, Dangote’s other public businesses–started by the same entrepreneur in the same business climate–Dangote Sugar and Dangote Flour, are financial failures (even before the oil crash), precisely because the early stage local production could not compete with cheap (often dumped) imports from Brazil. This is not to say that restrictionist trade policy or other industrial promotion is always the solution, but as Hamilton understood very well, it can be absolutely critical to developing new industry and is worth much more to entrepreneurs than sloganeering about the free market.

Gates’ other example, the Nigerian film industry (Nollywood), has conversely been able to thrive, probably because it enjoys a sort of cultural tariff. That is, while Nigeria does not impose any duty on imported films, it would not be surprising that Nigerian filmmakers could tell some stories in ways more compelling to a Nigerian audience than Hollywood. Gates, by the same token, has likely seen so few Nollywood films not because they are not available (they are to anyone with internet) but because he doesn’t like them–because they do not fit his own cultural proclivities–nay prejudices!–as well as American entertainment.

Ultimately, Gates reveals, yet again, that the most vociferous advocates of globalism actually know very little about their own countries and even less about any others. Global integration is not an appreciation of foreign cultures but a hatred of all culture.

With all his traipsing around Africa and showy philanthropic initiatives, Gates no doubt relishes the dream of turning Nigeria into America someday. But that will not happen.

For the deepest problem facing Nigeria, and many places much worse than there–which no gaudy international philanthropy can solve–is its lack of a true national culture and the consequent detachment of its elite from its people. As a result, its government exists simply to distribute patronage among various competing tribes, from whence stems most of its notorious corruption. Most of its business elite achieved their position by selling out their countrymen to maintain a privileged status as gas and diesel importers, and its bureaucrats seek only to secure a luxury hotel room on the next international junket.

No, globalism will not turn Nigeria into America, but it is turning America into Nigeria.